Chapter 6 of 613% of exam
Securities Analysis
The two schools of analysis used to value and select securities: fundamental analysis of intrinsic value, and technical analysis of price and volume patterns, plus the role of diversification in managing risk.
Fundamental and technical analysis
Fundamental analysis estimates intrinsic value from financial statements and the economy, using ratios such as the price-to-earnings (P/E) ratio, which shows how much investors pay per unit of earnings. Technical analysis instead studies historical price and volume, using charts, trends and indicators to anticipate movements. Diversifying across imperfectly correlated securities reduces unsystematic (specific) risk, though it cannot remove systematic (market-wide) risk.